News from Roy Saunders
The most fascinating part of my work over the past forty years has been to anticipate trends in international taxation. I have done this through studying the tax systems of various countries and reviewing case law and government statements. All of these confirm that business structures have to conform with the intention behind legislation, without the use of clever semantically driven constructions to create tax avoidance. The Ramsay Case in 1981 was perhaps the forerunner of a movement towards supporting the intention behind legislation and preventing the creation of artificial losses when in fact no loss was incurred. But it is only in the last ten years or so that we have witnessed such a sea change in the way business operates, and the structures which are past their sell by date as far as investors and entrepreneurs are concerned.
Following a new EU merger directive in 2009, and the adoption of Regulations to admit cross border mergers in the UK in 2007, corporate re-domiciliation came to the attention of practitioners who have seen changes in tax laws and double tax treaties negate the benefits of existing business structures. It would be commercially as well as tax inefficient to wind up operations in one country and start operations in another country, and therefore concepts such as the transfer of legal domicile, the transfer of the place of effective management, share for share exchanges, merger migrations under EU law or even the creation of a Societas Europea have to now be considered. Corporate migration is the theme of various discussion groups that I have held as chairman of the IBSA, and is particularly relevant now that Brexit is a certainty; this may indeed require UK companies to consider migration to a more favourable jurisdiction.
More recently, since the US introduced their FATCA provisions, we have seen the adoption of the Common Reporting Standard (CRS), legislation requiring the disclosure of beneficial ownership and persons with significant control (PSC rules), and a drive towards full transparency behind business structures through the requirement to maintain transfer pricing memoranda supporting inter-company pricing arrangements. Along with such heavy-handedness, however, comes a movement to demonstrate the unintended consequences of such global tax transparency. I am speaking with Philip Baker QC, Filippo Noseda of Withers, Richard Hay of Stikeman Elliott, along with many other established professionals, on such unintended consequences at an IBSA conference on 6 July in conjunction with Private Client Series at Merchant Taylors’ Hall, London on topics such as the infringement of human rights, the need to maintain data protection, the consequences of Brexit on the tax transparency agenda, and when it may be unnecessary to disclose ultimate beneficial ownership involving trusts and privacy. If readers of our IFS newsletters would like to attend this conference, the link to the conference is (CLICK HERE) but please contact the IBSA administrator, Lucie on email@example.com as she may be able to arrange special rates for attendance.
Another current trend that I would like to share with our readers relates to access to double tax treaties, and whether one can rely on the provisions of double tax treaties as hitherto. I was at a conference the other day when a speaker mentioned that ‘non-habitual residents’ of Portugal can benefit from double tax treaty provisions so that, for example, pension income from the UK would be exempt under the UK/Portuguese treaty and not taxable in Portugal under the non-habitual resident regime. I questioned whether the BEPS initiative aimed at preventing double non-taxation would be relevant in this case, and it is understood that certain countries have stated their intention to renegotiate their double tax treaties with Portugal to prevent non-habitual residents from benefiting from its provisions. Clearly the limitation of benefits provisions in various treaties, initiated by the US in its 1994 double tax treaty with the Netherlands, stipulates who may be entitled to benefit from relevant treaty provisions. However, even in the absence of a specific limitation, I believe that there is a movement by governments to negate double tax treaty benefits where the result is double non-taxation.
The Maltese regime of having a 35% corporate tax rate with 30% refunded to shareholders could even come under threat if significant treaty benefits were obtained at a cost of just an effective 5%. I intend to hold various discussion group meetings on this topic over the next few months in London and Amsterdam, and would be really interested to hear readers’ views on experiences they may have had where double tax treaty provisions are disregarded.
For those of you who have regularly heard of my fictitious case study centred around the Polycon Lens Company and its transition into the Eyemax Corporation, you or one of your junior associates may be interested in attending a Saturday morning workshop examining the international tax issues around the 12 stages of Polycon’s metamorphosis. As Chairman of the IBSA, it is my way of mentoring younger professionals on what international business structuring is all about, and the course is at no charge, courtesy of our sponsors, Squire Patton Boggs at whose premises near Liverpool Street, London the workshop will be held. The timing is 9.00 am to 1 pm followed by lunch, and the course will be presented by Dmitry and me. If you or a colleague would like to attend, again please contact IBSA’s administrator, Lucie, on her email firstname.lastname@example.org.
This month’s article is written by Dmitry as a teaser for a new e-book that he intends to write, answering the many questions we receive in the normal course of our advisory work, giving the readers an insight into technical issues prior to seeking formal advice from international tax practitioners.
With kind regards
UK Tax Primer for Entrepreneurial Clients
By Dmitry Zapol
Advising a client is a two-way process. The client knows how to get to their end destination and our duty is to help them do this with the least tax leakage and in the most commercially sound way. Although every client is unique, inevitably after years of providing advice, common patterns emerge as one realises that issues that trouble clients are largely the same. Here at IFS, we have always believed in “accessible knowledge”, doing our best to explain international tax and business planning to clients in the most practical way. Roy’s ITSAPT “Red” Book is the best example of a title that addresses the most commonly asked questions and which entrepreneurial clients can use to start organising their cross-border activities, even before coming to see us.
One day, after getting off the phone with yet another person looking to relocate to the UK, I realised that I should write a book of my own. Structured in a Q&A format, it would gather questions that trouble most international entrepreneurs getting involved with the UK — simple questions that require a surprising amount of research. Do I pay tax in the year I exchange contracts to sell my home or in the year I complete the sale? Can I pay a lower amount of tax if I sell my property rental company? Who will pay tax if my uncle gifts me £1 million? Will HMRC care that I tell my Cyprus corporate directors what to do from my UK home?
Rather than giving detailed responses, the book will give practical bite-sized knowledge that will arm its readers prior to seeking formal advice. However, of course some will attempt DIY tax planning, which we strongly discourage. The focus will be primarily on the tax side of things, although where appropriate references will be made to legal and compliance matters. The publication will come out as an e-book and perhaps as an app, which will allow me to update it regularly. In one of the following IFS newsletters, readers will find a proposed list of topics, on which they will be welcome to comment. The following passages illustrate the approach that the book is going to follow.
What is the difference between a UK LP and a UK LTD?
An LP is a limited partnership whereas a LTD is a limited company. The former is tax transparent with the tax liability falling on the partners, whereas the latter is tax opaque, subject to tax in the jurisdiction of its residence.
Provided that an LP has non-UK resident partners and does not conduct business in the UK, it will not be subject to UK taxation. For this reason, LPs are frequently used as fronts for offshore entities which want to trade in or with countries that blacklist low-tax jurisdictions. Commonly, the choice lies between English and Scottish LPs. The two have similar tax and reporting obligations, however, in Scotland LPs have their own distinct legal personalities that allow them to sign contracts in their own names without revealing their partners. So far, the UK’s Register of People with Significant Control (PSC Register) has excluded LPs that do not have any UK assets from publishing information about their individual owners. Recently, the UK Government called for a review of limited partnership (Reference 1 below) and whether the current regime will stay in place remains to be seen.
A company that is registered or managed and controlled in the UK has its own legal personality and is also liable to corporation tax on its worldwide income. A company is owned by shareholders that receive distributions from the company and pay tax according to their personal tax liability. UK companies must submit information about their UBOs to the PSC Register, which is available to the general public.
An LP can be incorporated into a company [See Question X], however, when incorporating a Scottish limited partnership, one must decide, whether they want to continue with a Scottish or an English limited company. Although company laws are very similar in both countries, an English solicitor would not normally advise on matters of Scottish law, which might cause practical difficulties.
How can I use a UK company in my international structure?
A company that is resident in the UK is liable to corporation tax on its income. The current tax rate is 19% and it is currently destined to go down to 17% in 2020. Where income suffers foreign withholding tax, it can be credited towards the company’s UK tax liability even in the absence of a double tax treaty.
By default, the UK taxes resident individuals and companies on their worldwide income, particularly with respect to their trading income. However, there are circumstances where territorial taxation takes precedence and foreign-source income is exempt from UK taxation. More particularly, dividends received from foreign subsidiaries may be exempt from UK tax [See Question X]. Secondly, a UK company may elect to avoid taxation of income earned by its foreign branch [See Question X].
A UK company may claim the substantial shareholding exemption [See Question X] and avoid taxation in respect of gains realised on disposal of foreign subsidiaries; however, it can be rather restrictive. In particular, the exemption only applies to disposals of subsidiaries that pursue trading activities within a trading group. As a result, disposals of purely investment subsidiaries are excluded.
These exemptions are subject to broad anti-avoidance rules. First, the controlled foreign companies (CFC) rules [See Question X] make a UK company liable to corporation tax on income earned by its foreign subsidiaries that are subject to a significantly lower rate of foreign taxation. Second, a UK holding company may be subject to corporation tax on capital gains earned by its foreign subsidiary under the attribution rules [See Question X]. Both the CFC and attribution of gains charges apply only where the UK company owns at least 25% of the foreign subsidiary’s shares and there are additional various exemptions that take most bona fide commercial arrangements outside their scope. Recently, a new tax on diverted profits was introduced; however, it should not be relevant for most small and medium-sized international businesses.
One key advantage of the UK is that there is no withholding tax on dividends, as a result of which non-UK resident shareholders suffer no further UK tax burden. Conversely, there is 20% withholding tax on interest payable on loans received from abroad. Although this may put foreign lenders at a serious disadvantage, the tax burden can be reduced under double taxation treaties, or the EU Interest and Royalties Directive, or through the use of special instruments such as deeply discounted securities or quoted Eurobonds. Also, interest on loans provided for less than a year is not subject to tax.
Most royalties are also subject to 20% withholding tax and recently we have seen an introduction of strict rules aiming at limiting the scope of potential avoidance. The rate can be reduced under double taxation treaties, or again under the EU Interest and Royalties Directive, or through using the UK company to hold a particular type of IP asset, to which withholding tax does not apply (for example, film copyrights).
What are the tax consequences of receiving a cash gift from abroad?
Gifts do not constitute income in the hands of a recipient, and a person who receives a gift of money is not liable to tax irrespective of who has made the gift. However, this presumes that the gift is genuine and is not a disguised distribution of the recipient’s income or chargeable gains.
However, the liability might fall on the person making the gift. First, if the donor is domiciled outside the UK and claiming the remittance basis of taxation [See Question X], the gift might constitute their taxable remittance. Second, if the donor is UK domiciled or deemed domiciled, or domiciled outside the UK but making the gift from a UK bank account, the gift might constitute a potentially exempt transfer [See Question X]. If they die within seven years of making it, their estate will suffer inheritance tax consequences. Third, if the donor is not resident in the UK at the time of making the gift but becomes resident later, he might suffer the income tax pre-owned asset charge [See Question X] should they benefit from gift themselves in any way. This can occur when, for example, a child uses the money received from their parents abroad to buy a home in the UK, into which the parents move later after becoming UK resident.
I would love to hear from IFS Newsletter readers on any questions they may have which I could incorporate into the e-book and app, and hope that I have whetted the reader’s appetite to continue watching this space!